Income Inequality

Steven Pearlstein of the WP tackles the non-issue of income inequality. He started off with some good fundamental free market analysis.

The factors responsible for the inequality -- the new technology, increased trade and immigration, deregulation, deunionization, the relentless focus on "shareholder value" -- are also the ones that have produced big gains in productivity and job growth and restored the United States as the world's most competitive economy.

Then quickly devolves into a familiar mantra.

The classic redistribution scheme would be to raise taxes on the top 10 percent of income earners, roughly those with household incomes above $125,000, who have captured the lion's share of the benefits of economic growth. The money could then be directed to the poor and middle class, whose incomes have been flat, in the form of tax cuts and increased government benefits and services.

Then Pearlstein hits a nugget that I really like.

And while Democrats love to demagogue on the reduced 15 percent rate for capital gains and dividends, they've never really made a credible case for why capital income should be taxed twice.

You know why they've never made a good case for why it should be taxed twice? Because it shouldn't. It's fundamentally unfair and provides disincentives for corporations to distribute earnings to shareholders via dividends. Then those earnings in the corporate coffers go towards growth and acquisitions, which aren't fundamentally bad, but, growth and acquisitions create the huge corporations some people (those who worry most about income inequality) love to rail against.

This is a point I though about while reading "Small Giants". The companies weren't corporations and didn't have the strong incentive to grow. Instead they could distribute their earnings as they saw fit, either as salary y for themselves or charitable work or give it to the employees. Corporations, on the other hand, have investors who are seeking a return on their investment. Since dividends are taxed every time they're distributed, investors want the company to reinvest in itself to create growth which, theoretically, produces an increased stock price. Sure, the capital gains are taxed, but, an investor has a little more discretion as to when he/she wants to take that tax hit.

In short, when Democrats argue for increasing the tax rate on dividends and capital gains, they are contributing to the perceived problem of income inequality.

Pearlstein is doing a chat today at 11 am ET on the issue of income inequality. I'll be interested to see if anybody brings up these points, or more likely, if he'll choose to select a question in this realm.